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Integrity of OVDP May Be At Risk

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    The Personal Income Taxation Committee of the New York City Bar Association has asked the IRS to reconsider its disqualification of taxpayers previously accepted into the Offshore Voluntary Disclosure Program.

    Based on public reports, it appears that the total number of taxpayers directly affected by the disqualification seems to be relatively few — about 50 or so who held unreported accounts at Bank Leumi in Israel. However, the incident has received attention in the mainstream media and among practitioners. The New York Bar argued that implications for the IRS are much broader than those taxpayers directly affected and are likely to have a much greater impact on the OVDP.

    The IRS’s disqualification of taxpayers who were previously accepted into the OVDP and in some cases had provided detailed information to the IRS in reliance on their “pre-clearance” to participate in the program, will inevitably affect the ongoing success of the OVDP as a whole. By reversing its pre-clearance and preliminary acceptance of these taxpayers, the letter states that the IRS has undermined the ability of practitioners to advise their clients with certainty as to how the program works. Attorneys will now have to advise their clients and prospective clients that they may be disqualified from participating in the OVDP even after they were admitted into the program and disclosed detailed information about their foreign bank accounts. This information will lead clients to hesitate to come forward with additional disclosures.

    The disqualification was apparently caused by a lack of communication between the IRS (which pre-clears and accepts taxpayers into the OVDP) and the Department of Justice, which presumably had the taxpayers’ names prior to the taxpayers being pre-cleared for the program. Any attempt by the DOJ to prosecute such taxpayers will undermine the clarity and certainty that the program is designed to provide.

    To resolve the situation and restore the integrity of the OVDP, the letter urges the IRS to both readmit the disqualified taxpayers into the program and to institute new safeguards to avoid such a situation from occurring again. The NYC Bar also wants the IRS to reassure future participants, through its website, regarding the minimal risk of being disqualified from the program after admission.


    Luxembourg announced on Tuesday that it will share information with the US tax authorities about bank accounts held in the country by citizens and residents of the United States.

    The announcement was made on the eve of a summit of European Union leaders at which holdouts Luxembourg and Austria are under pressure from EU partners to implement the automatic sharing of bank account information among EU states to combat tax evasion and fraud.

    The Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 by Congress to target U.S. taxpayers with foreign bank accounts so as to ensure they paid their contributions.

    Until now, Luxembourg, like Austria, has applied a withholding tax on the interest paid on such accounts at source and has only supplied account information to foreign tax authorities on request. Starting January 2015, however, Luxembourg will do so automatically.

    Additionally, Luxembourg said it wanted to see the success of European Commission negotiations with financial centers Switzerland, Liechtenstein, Andorra, Monaco and San Marino on sharing such information.


    Disclosing foreign accounts enables U.S. taxpayers to become compliant, avoid substantial civil penalties, and essentially eliminate the risk of criminal prosecution. Those who fail to disclose such accounts run the risk of even higher penalties, including the fraud penalty and foreign information return penalties, not to mention criminal prosecution.

    Hiring a tax attorney is the best way to minimize possible civil and criminal penalties. The attorneys at the Tax Law Office of David W. Klasing know how to navigate the nuanced and ever-changing tax laws relating to foreign account disclosure requirements. If you have offshore accounts and want to know the best way to proceed, contact us today


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